A recent editorial featured in various Chinese media outlets discusses how China might address the rise of US dollar stablecoins. Former President Trump’s executive order on cryptocurrencies encouraged the adoption of dollar stablecoins, not only in the U.S. but globally. Europe has already expressed concerns regarding monetary sovereignty, despite implementing limits on foreign currency stablecoins for everyday transactions. Now, it appears to be China’s turn to consider its approach, with proposals suggesting an exploration of stablecoins.
The article titled “Digital Currency Reconstructs the International Financial System” was penned by Zhang Ming, Deputy Director of the National Finance and Development Laboratory, recognized as China’s first economics think tank, now joined by several others.
Zhang points out that US dollar stablecoins have established themselves as the leading fiat currency in crypto trading and decentralized finance (DeFi) for crypto-related loans. Furthermore, they are increasingly favored by individuals in countries with weak currencies as a reliable store of value.
“As the U.S. dollar stablecoin increasingly intertwines the international credit of the U.S. dollar with applications in the virtual realm, it may significantly reinforce the hegemony of the U.S. dollar,” he articulated.
Expanding the Scope of CBDC
Zhang proposes a three-pronged strategy. Firstly, he notes that China’s central bank digital currency (CBDC) has a limited scope. The digital RMB is currently focused on M0, or retail transactions, rather than business-to-business or institutional applications. He advocates for its expansion to M1 and M2, thereby competing with all bank deposits.
While M0 was the initial focus of the pilot CBDC, reports of B2B transactions, including cross-border payments for oil and metals, imply it may have already evolved beyond that scope. Additionally, Zhang did not mention mBridge, the cross-border CBDC initiative with a clear international focus, which concerns some due to its connection with sanctioned nations.
Opportunities for Chinese Stablecoins
Zhang also advocates for China to explore stablecoin options as a promising opportunity. He notes that such experiments are already underway in Hong Kong, which has authorized new cryptocurrency exchanges and enabled retail access. Hong Kong’s Zhong An Bank was a pioneer in offering retail cryptocurrency services in Asia and recently established a stablecoin sandbox alongside several partners.
Mr. Zhang emphasizes that expanding the use of digital tokens on platforms such as Ant, including its subsidiaries Alipay and Ant International, could significantly enhance the international status of the RMB, allowing for a more measured response to US dollar stablecoin challenges.
Proposal for an Electronic SDR
Lastly, he suggests creating an electronic version of the IMF’s special drawing rights (SDR), a basket including the most traded currencies, like the renminbi. Currently, SDRs can only be held by central banks and multilateral institutions, a point not new in China’s discourse.
“The rise of multiple digital currencies is preferable to the U.S. dollar monopolizing the digital currency landscape. An e-SDR could enhance the use of supranational reserve currencies in the digital domain,” he stated.
Interestingly, his proposal for an e-SDR reflects back to the initial intentions of the Facebook-founded Libra stablecoin, which was meant to represent a diverse currency basket (not including the renminbi). However, it prompted increased interest in central bank digital currencies globally before facing regulatory pushback. As history shows, the tides of change often come full circle.
